UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





FORM 10-Q





(Mark One)


x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934





For the quarterly period ended: June 30, 2010


or





 ̈
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934





For the transition period from ____________ to _____________





Commission File Number:0-53570


ActiveCare, Inc.


(Exact name of registrant as specified in its charter)





Delaware
87-0578125(State or other jurisdiction of incorporation

or organization)
(I.R.S. Employer Identification No.)5095 West 2100 South

West Valley City, Utah
84120(Address of principal executive offices)
(Zip Code)





(801) 974-9474


(Registrant's telephone number, including area code)





(Former name, former address and former fiscal year if changed since last report)





Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes x  No  ̈





Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).


Yes  ̈  No  ̈





Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.





Large accelerated filer  ̈
Accelerated filer  ̈Non-accelerated filer  ̈
Smaller reporting company x





Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)


Yes   ̈   No  x


As of August 11, 2010, the registrant had 18,149,160 shares of common stock outstanding.





ActiveCare, Inc.


(Formerly Volu-Sol Reagents Corporation)





Table of Contents





PagePART I – FINANCIAL INFORMATION
3Item 1. Financial Statements
3Condensed Consolidated Balance Sheets (unaudited)
3Condensed Consolidated Statements of Operations (unaudited)
5Condensed Consolidated Statements of Cash Flows (unaudited)
6Notes to Condensed Consolidated Financial Statements (unaudited)
8Item 2. Management's Discussion and Analysis of Financial Condition and Results of  Operations
19Item 3. Quantitative and Qualitative Disclosures About Market Risk
27Item 4.  Controls and Procedures
27PART II – OTHER INFORMATION
28Item 1. Legal Proceedings.
28Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
28Item 3. Defaults Upon Senior Securities
29Item 6. Exhibits
29SIGNATURES
31





2


PART I – FINANCIAL INFORMATION





Item 1.  Financial Statements.


ActiveCare, Inc


(Formerly Volu-Sol Reagents Corporation)


Condensed Consolidated Balance Sheets


(unaudited)


June 30, 2010


September 30, 2009AssetsCurrent assets:Cash

$
97,172


$
830,931Accounts receivable, net of allowance for doubtful accounts of $3,300and $3,000, respectively


98,628



63,469Inventories, net of reserve of $36,540 and $34,517, respectively


43,284



48,965Prepaid expenses and other assets


8,350



12,431Total current assets


247,434



955,796Property and equipment, net of accumulated depreciation of $425,623 and $408,652, respectively


91,927



71,967Deposits


79,250



65,000Domain Name, net of amortization of $536 and $0,respectively


13,764



-Leased Equipment, net of amortization of $15,432 and $0,respectively


51,307



-License agreement, net of amortization of $39,254 and $14,019, respectively


260,746



285,981Intangible asset – access to financing, net of amortizationof $735,840 and $40,880, respectively


-



694,960Investment


50,000



-Total assets

$
794,428


$
2,073,704





See accompanying notes to condensed consolidated financial statements




3


ActiveCare, Inc


(Formerly Volu-Sol Reagents Corporation)


Condensed Consolidated Balance Sheets


(unaudited) cont.





June 30, 2010


September 30, 2009Liabilities and Stockholders’ EquityCurrent liabilities:Accounts payable

$
449,138


$
248,552Derivative liability


1,198,050



-Accrued expenses


269,859



154,544Deferred Revenue


15,747



-Related party notes payable


25,000



-Unrelated party note payable, net of discount of $12,328 and $0, respectively


17,672



-Accrued payable on license agreement


300,000



300,000Series A convertible preferred stock, net of discount of$46,317 and $615,829, respectively (aggregateliquidation preference of $1,000,000)


953,683



384,171Series B convertible preferred stock, net of discount of$221,178 and $0, respectively (aggregate liquidationpreference of $600,000)


378,822



-Total current liabilities


3,607,971



1,087,267Total liabilities


3,607,971



1,087,267Stockholders’ equity (deficit):Preferred stock; $.00001 par value, 10,000,000 shares authorized; 0 and 0 shares issued and outstanding, respectively


-



-Common stock, $.00001 par value, 50,000,000 shares authorized; 15,495,603 and 11,822,639 shares issued and outstanding, respectively


155



118Additional paid in capital


8,212,842



6,043,470Accumulated deficit


(11,026,540
)


(5,057,151
)Total stockholders’ equity (deficit)


(2,813,543
)


986,437Total liabilities and stockholders’ equity (deficit)

$
794,428


$
2,073,704







See accompanying notes to condensed consolidated financial statements


4


ActiveCare, Inc.


(Formerly Volu-Sol Reagents Corporation)


Condensed Consolidated Statements of Operations


(unaudited)




Three months ended

June 30,


Nine months ended

June 30,2010


2009


2010


2009Revenues:Care Services

$
19,880


$
-


$
36,371


$
-Reagents


125,260



118,952



347,129



350,019Total revenues


145,140



118,952



383,500



350,019Cost of RevenueCare Services


74,525



-



196,612



-Reagents


86,772



95,224



273,382



299,136Total cost of revenues


161,297



95,224



469,994



299,136Gross margin


(16,157
)


23,728



(86,494
)


50,883Operating expensesResearch and development


16,610



12,538



213,579



138,944Selling, general and administrative


2,070,983



550,947



4,712,066



956,757Loss from operations


(2,103,750
)


(539,757
)


(5,012,139
)


(1,044,818
)Other income (expenses):Gain (loss) on derivative liability


(161,332
)


-



477,297



-Interest income


-



2,262



-



14,723Interest expense


(394,657
)


(739
)


(1,092,589
)


(1,237
)Other income (expenses)


-



2,400



(342
)


35,607
  Net loss

$
(2,659,739
)

$
(535,834
)

$
(5,627,773
)

$
(995,725
)Net loss per common share – basic and diluted

$
(.18
)

$
(.05
)

$
(.43
)

$
(0.11
)Weighted average shares – basic and diluted


14,774,688



10,072,000



13,017,780



9,346,000









See accompanying notes to condensed consolidated financial statements


5




ActiveCare, Inc.


(Formerly Volu-Sol Reagents Corporation)


Condensed Consolidated Statements of Cash Flows


(unaudited)







Nine Months Ended

June 30,2010


2009Cash flows from operating activities:Net loss

$
(5,627,773
)

$
(995,725
)Adjustments to reconcile net loss to net cash usedIn operating activities:Depreciation and amortization


753,992



15,184Amortization of deferred consulting and financing


558,868



-Common stock issued for services


200,037



187,497Warrants issued for services


1,714,828



252,031Amortization of debt discount recorded as interestexpense


970,252



-Common stock issued for interest


45,162



-Gain on derivative liability


(477,296
)


-Changes in operating assets and liabilities:Accounts receivable


(35,159
)


12,858Interest receivable


-



(14,252
)Inventories


5,681



348Prepaid expenses and other assets


(60,168
)


(11,262
)Accounts payable


199,724



26,953Accrued liabilities


115,315



(39,005
)Deferred revenue


15,747



-Net cash used in operating activities


(1,620,790
)


(565,373
)Cash flows from investing activities:Payments for property and equipment


(36,930
)


(11,549
)Purchase of leased equipment


(71,500
)


-Disposal of leased equipment


4,761



-Purchase of intangibles


(14,300
)


-Net cash used in investing activities


(117,969
)


(11,549
)Cash flows from financing activities:Shares issued for option exercise


350,000Proceeds from related-party notes


55,000



303,280Proceeds from sale of common stock


-



200,000Issuance of Series B preferred stock


600,000



-Net cash provided by financing activities


1,005,000



503,280Net decrease in cash


(733,759
)


(73,642
)Cash, beginning of period


830,931



474,146Cash, end of period

$
97,172


$
400,504










See accompanying notes to condensed consolidated financial statements


6





ActiveCare, Inc.


(Formerly Volu-Sol Reagents Corporation)


Condensed Consolidated Statements of Cash Flows


(unaudited) cont.




Nine Months Ended

June 30,2010


2009Supplemental Cash Flow Information:Cash paid for income taxes

$
-


$
-Cash paid for interest

$
-


$
-Non-Cash Investing and Financing:Issuance of stock for loan origination fees

$
50,500


$
-Patent license purchased with debt

$
-


$
300,000





See accompanying notes to condensed consolidated financial statements


7





ActiveCare, Inc.


Notes to Condensed Consolidated Financial Statements


(unaudited)





1.
Basis of Presentation





The unaudited interim condensed consolidated financial information of ActiveCare, Inc. (the “Company” or “ActiveCare”) has been prepared in accordance with Article 10 of Regulation S-X promulgated by the Securities and Exchange Commission.  Certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations.  In the opinion of management, the accompanying interim condensed consolidated financial information contains all adjustments, consisting only of normal recurring adjustments necessary to present fairly the Company’s financial position as of June 30, 2010, and results of its operations for the three and nine months ended June 30, 2010 and 2009.  These financial statements should be read in conjunction with the annual consolidated financial statements and notes thereto that are included in the Company’s Annual Report on Form 10-K for the year ended September 30, 2009.  The results of operations for the three and nine months ended June 30, 2010 may not be indicative of the results for the fiscal year ending September 30, 2010.





Going Concern


The Company incurred a net loss and has negative cash flows from operating activities for the years ended September 30, 2009 and 2008 and for the period ended June 30, 2010.  These factors raise substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.





In order for the Company to remove substantial doubt about its ability to continue as a going concern, the Company must generate positive cash flows from operations and obtain the necessary funding to meet its projected capital investment requirements.  Management’s plans with respect to this uncertainty include raising additional capital from the sale of the Company’s common stock or attempting to secure additional financing through traditional bank financing or a debt offering.  There can be no assurance that revenues will increase rapidly enough to offset operating losses and repay debts.  If the Company is unable to increase revenues or obtain additional financing, it will be unable to continue the development of its products and may have to cease operations.





Use of Estimates in the Preparation of Financial Statements


The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.





2.
Revenue Recognition





The Company’s revenue has historically been from three sources: (i) sales from Care Services; (ii) diagnostic equipment product sales; and (iii) sales of medical diagnostic stains.





Care Services


“Care Services” include lease contracts in which the Company provides Care Services and leases devices to distributors or end users and the Company retains ownership of the leased device.  The Company typically leases its devices on a month-to-month contract with customers (members) that use the Company’s Care Services.  However, these contracts may be cancelled by either party at anytime with 30 days notice.  Under the Company’s standard contract, the leased device becomes billable on the date the customer (member) orders the product, and remains billable until the device is returned to the Company.  The Company recognizes revenue on leased devices at the end of each month that Care Services have been provided.  In those circumstances in which the Company receives payment in advance, the Company records these payments as deferred revenue.





The Company recognizes Care Services revenue when persuasive evidence of an arrangement with the customer exists, title passes to the customer, prices are fixed or determinable and collection is reasonably assured.


8


Shipping and handling fees are included as part of net sales. The related freight costs and supplies directly associated with shipping products to customers are included as a component of cost of goods sold.





Customers order the Company’s product lines by phone or website.  The Company does not enter into long-term contracts.  All of the Company Care Services sales are made with net 30-day payment terms.





In connection with generally accepted accounting principles to qualify for the recognition of revenue at the time of sale, the Company notes the following:





·
The Company’s price to the buyer is fixed or determinable at the date of sale.


·
The buyer has paid the Company, or the buyer is obligated to pay the Company within 30 days, and the obligation is not contingent on resale of the product.


·
The buyer's obligation to the Company would not be changed in the event of theft or physical destruction or damage of the product.


·
The buyer acquiring the product for resale has economic substance apart from that provided by the Company.


·
The Company does not have significant obligations for future performance to directly bring about resale of the product by the buyer.


·
The amount of future returns can be reasonably estimated and they are negligible.




Accounting standards state that, “an enterprise shall report revenues from external customers for each product and service or each group of similar products and services unless it is impractical to do so.”  In the Care Services revenue line, vast majority of the Company’s sales are Care Service revenue.  Because Care Service equipment sales are not material to the financial statements, the Company discloses sales as one line item.





The Company’s revenue recognition policy for sales to distributors is the same as the policy for sales to end-users.





A customer qualifies as a distributor by completing a distributor application and proving its sales tax status.    The Company’s distributors are not required to maintain specified amounts of product on hand, and distributors are not required to make minimum purchases to maintain distributor status.  Distributors have no stock rotation rights or additional rights of return.  Sales to distributors are recorded net of discounts.





Sales returns have been negligible, and any and all discounts are known at the time of sale.  Sales are recorded net of sales returns and sales discounts.  There are no significant judgments or estimates associated with the recording of revenues.





Diagnostic Equipment Product Sales


Although not the focus of the Company’s new business model, the Company also sells diagnostic devices in certain situations. The Company recognizes product sales revenue when persuasive evidence of an arrangement with the customer exists, title passes to the customer and the customer cannot return the devices, prices are fixed or determinable and collection is reasonably assured.





Medical Diagnostic Stain Sales




The Company recognizes medical diagnostic stains revenue when persuasive evidence of an arrangement with the customer exists, title passes to the customer, prices are fixed or determinable and collection is reasonably assured.




Shipping and handling fees are included as part of net sales. The related freight costs and supplies directly associated with shipping products to customers are included as a component of cost of goods sold. Neither the sale of diagnostic equipment nor the sale of medical diagnostic stains contains multiple deliverables.





Customers order the Company’s diagnostic Stain product lines by purchase order.  The Company does not enter into long-term contracts.  Its diagnostic equipment sales were $3,938 for the three months ended June 30, 2010 and its medical diagnostic stain sales were $121,322 for the three months ended June 30, 2010.  All of the Company’s sales are made with net 30-day payment terms.





In connection with generally accepted accounting principles to qualify for the recognition of revenue at the time of sale, the Company notes the following:




9


·
The Company’s price to the buyer is fixed or determinable at the date of sale.


·
The buyer has paid the Company, or the buyer is obligated to pay the Company within 30 days, and the obligation is not contingent on resale of the product.


·
The buyer's obligation to the Company would not be changed in the event of theft or physical destruction or damage of the product.


·
The buyer acquiring the product for resale has economic substance apart from that provided by the Company.


·
The Company does not have significant obligations for future performance to directly bring about resale of the product by the buyer.


·
The amount of future returns can be reasonably estimated and they are negligible.


·
Customers may return diagnostic equipment within 30 days of the purchase date. Customers may return the medical diagnostic stains within 30 days of the purchase date provided that the stain’s remaining life is at least 8 months. Customers must obtain prior authorization for a product return.





The Company’s diagnostic stain products have not been modified significantly for several years.  There is significant history on which to base the Company’s estimates of sales returns.  These sales returns have been negligible.





The Company has 70 types of products based on the number of individual stock-keeping units (“SKUs”) in its inventory.  Most of these 70 SKUs are for medical diagnostic stain inventory.  For example, certain medical diagnostic stains are packaged in different sizes, and each packaged size (i.e. 16 oz., 32 oz., and 48 oz.) has a unique SKU in inventory.  Accounting standards state that, “an enterprise shall report revenues from external customers for each product and service or each group of similar products and services unless it is impractical to do so.”  The vast majority of the Company’s sales are of medical diagnostic stains, with a minimal portion of sales being diagnostic equipment.  Because diagnostic equipment sales are not material to the financial statements, the Company discloses sales as one line item.





The Company’s revenue recognition policy for sales to distributors is the same as the policy for sales to end-users.





A customer qualifies as a distributor by completing a distributor application and proving its sales tax status.  Upon qualifying as a distributor, a customer receives a 35% discount from retail prices, and the distributor receives an additional 5% discount when product is purchased in case quantities.  The Company’s distributors are not required to maintain specified amounts of product on hand, and distributors are not required to make minimum purchases to maintain distributor status.  Distributors have no stock rotation rights or additional rights of return.  Sales to distributors are recorded net of discounts.





Sales returns have been negligible, and any and all discounts are known at the time of sale.  Sales are recorded net of sales returns and sales discounts.  There are no significant judgments or estimates associated with the recording of revenues.





3.
Net Loss per Common Share





Diluted net loss per common share ("Diluted EPS") is computed by dividing net loss by the sum of the weighted average number of common shares outstanding and the weighted-average dilutive common share equivalents then outstanding.  The computation of Diluted EPS does not assume exercise or conversion of securities that would have an anti-dilutive effect.





Common share equivalents consist of shares issuable upon the exercise of common stock warrants, and shares issuable upon conversion of preferred stock.  As of June 30, 2010 and 2009, there were 14,663,865 and 0 outstanding common share equivalents, respectively, that were not included in the computation of diluted net loss per common share as their effect would be anti-dilutive.





4.
Recent Accounting Pronouncements





In September 2006, the Financial Accounting Standards Board (FASB) issued guidance which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements.  It is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years.  In February 2008, the FASB extended the effective date to fiscal years beginning after November 15, 2008.  The Company adopted this guidance on October 1, 2009.  This guidance did not have a material impact on the financial statements.


10





In December 2007, the FASB issued guidance which requires an acquirer of a business to measure the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquiree at their fair values on the acquisition date, with goodwill being the excess value over the net identifiable assets acquired.  It clarifies that a non-controlling interest in a subsidiary should be reported as equity in the financial statements, net income shall be adjusted to include the net income attributed to the non-controlling interest and comprehensive income shall be adjusted to include the comprehensive income attributed to the non-controlling interest.  The calculation of earnings per share will continue to be based on income amounts attributable to the parent.  This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2008.  Early adoption is prohibited.  The Company adopted this guidance on October 1, 2009.  This guidance did not have a material impact on the financial statements.





In November 2008, the FASB provided guidance which clarifies the accounting for certain transactions and impairment considerations involving equity method investments. This guidance is effective for fiscal years beginning after December 15, 2008, with early adoption prohibited.  The Company adopted this guidance on October 1, 2009.  This guidance did not have a material impact on the financial statements.





In June 2008, the FASB provided guidance which assists in determining whether an instrument (or embedded feature) is indexed to an entity’s own stock. This amendment is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early application is not permitted. A contract that would otherwise meet the definition of a derivative but is both (a) indexed to the Company’s own stock and (b) classified in stockholders’ equity in the statement of financial position would not be considered a derivative financial instrument. This amendment provides a new two-step model to be applied in determining whether a financial instrument or an embedded feature is indexed to an issuer’s own stock and thus able to qualify for the this exception. The Company adopted this guidance on October 1, 2009 see Note 5 for the accounting impact.





In June 2009, the FASB issued accounting guidance on the consolidation of variable interest entities (VIEs). This new guidance revises previous guidance by eliminating the exemption for qualifying special purpose entities, by establishing a new approach for determining who should consolidate a variable-interest entity and by changing when it is necessary to reassess who should consolidate a variable-interest entity.  This guidance will be effective at the beginning of the first fiscal year beginning after November 15, 2009. Early application is not permitted.  The Company does not anticipate that this will have a material impact on the financial statements.





In September 2009, the FASB issued guidance that changes the existing multiple-element revenue arrangements guidance currently included under its Revenue Arrangements with Multiple Deliverables codification. The revised guidance primarily provides two significant changes: 1) eliminates the need for objective and reliable evidence of the fair value for the undelivered element in order for a delivered item to be treated as a separate unit of accounting, and 2) eliminates the residual method to allocate the arrangement consideration. In addition, the guidance also expands the disclosure requirements for revenue recognition. This will be effective for the first annual reporting period beginning on or after June 15, 2010, with early adoption permitted provided that the revised guidance is retroactively applied to the beginning of the year of adoption. The Company is currently assessing the future impact of this new accounting update to its financial statements.





In October 2009, the FASB issued guidance on share-lending arrangements entered into on an entity's own shares in contemplation of a convertible debt offering or other financing.  This new guidance is effective for fiscal years beginning on or after December 15, 2009, and fiscal years within those fiscal years for arrangements outstanding as of the beginning of those years. Retrospective application is required for such arrangements and early application is not permitted.  The adoption of this guidance is not expected to significantly impact the Company’s results of operations and financial position.





In January 2010, the FASB issued guidance which requires an entity to disclose the following:





·
Separately disclose the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe reasons for the transfers.


·
Present separately information about purchases, sales, issuances and settlements, on a gross basis, rather than on one net number, in the reconciliation for fair value measurements using significant unobservable inputs (Level 3).


·
Provide fair value measurement disclosures for each class of assets and liabilities.
 ·
Provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements for fair value measurements that fall in either Level 2 or level 3.




11





This guidance is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements.  Those disclosures are effective for fiscal years beginning after December 15, 2010.  The Company adopted this guidance during the quarter ended December 31, 2009.  This guidance did not have a material impact on the financial statements.





In February 2010, the FASB issued ASU No. 2010-09, “Amendments to Certain Recognition and Disclosure Requirements” (“ASU 2010-09”), which is included in the FASB Accounting Standards Codification (the “ASC”) Topic 855 (Subsequent Events). ASU 2010-09 clarifies that an SEC filer is required to evaluate subsequent events through the date that the financial statements are issued. ASU 2010-09 is effective upon the issuance of the final update and did not have a significant impact on the Company’s financial statements.





5.
Change in Accounting Principle





Beginning October 1, 2009, the Company recognized the fair value of the Class A and Class B warrants along with the embedded conversion features of the Series A Preferred Stock (“Series A”) as derivative liabilities on its consolidated balance sheet. This was as a result of the adoption of new guidance as found in ASC Topic 815-10, effective for the Company at the beginning of this fiscal year.  Accordingly, changes in the fair value of these liabilities at each reporting period are required to be recognized as non-cash expense or income in the consolidated statement of operations.  Future movements in the Company’s stock price alone can materially affect both its results of operations and financial position in the future.  Substantial movements in the Company’s stock price could result in material volatility in the Company’s results of operations and financial position.





Upon adoption, a cumulative effect adjustment was recorded, based on amounts that would have been recognized if this guidance had been applied from the issuance date of the affected instruments.  The following table illustrates the changes to the Company’s consolidated balance sheet resulting from the implementation of this guidance:





Balance at

September 30,

2009


Cumulative

Effect

Adjustment


Balance at

October 1,

2009Series A convertible preferred stock, net(liability)

$
(384,171
)

$
255,159


$
(129,012
)Derivative liability

$
-


$
(1,309,593
)

$
(1,309,593
)Additional paid in capital

$
(6,043,470
)

$
712,818


$
(5,330,652
)Accumulated deficit

$
5,057,151


$
341,616


$
5,398,767





The fair value of the warrants and beneficial conversion feature on the Series A of $712,818 was included in additional paid-in capital on the issuance date of the Preferred stock and warrants (September 10, 2009).  As a result of the reclassification to derivative liabilities, the cumulative effect of these adjustments on October 1, 2009 was an increase in the discount on the Series A of $255,159, an increase in derivative liability of $1,309,593, a reduction of additional paid-in capital of $712,818 and a corresponding increase in the Company’s accumulated deficit of $341,616. See Notes 11 and 13 for further treatment of the derivative liabilities.





6.
Inventory





Inventories are recorded at the lower of cost or market, cost being determined on a first-in, first-out ("FIFO") method. Inventories consisted of raw materials, work-in-process, and finished goods.  Inventories as of June 30, 2010 and September 30, 2009 were as follows:


12





June 30


September 30Raw materials

$
69,284


$
38,851Work in process


4,216



5,422Finished goods


6,324



39,209Reserve for inventory obsolescence


(36,540
)


(34,517
)Total inventory

$
43,284


$
48,965





Provisions, when required, are made to reduce excess and obsolete inventories to their estimated net realizable values. Due to competitive pressures and technological innovation, it is possible that estimates of the net realizable value could change in the near term.





7.
Property and Equipment





Property and equipment consisted of the following as of June 30, 2010 and September 30, 2009:





June 30


September 30Equipment

$
196,690


$
171,577Software


19,259



15,498Leasehold improvements


274,437



269,448Furniture and fixtures


27,164



24,096517,550



480,619Accumulated depreciation


(425,623
)


(408,652
)Property and equipment, net of accumulated depreciation

$
91,927


$
71,967





Depreciation expense for the nine months ended June 30, 2010 and 2009 was $16,970, and $8,868, respectively.





8.
Leased Equipment





The Company purchases equipment that it intends to lease to customers under certain terms.  Leased equipment consisted of the following as of June 30, 2010 and September 30, 2009:





June 30


September 30Leased equipment

$
66,739


$
-Accumulated depreciation


(15,432
)


-Leased equipment, net of accumulated depreciation

$
51,307


$
-





Depreciation expense for the three months ended June 30, 2010 and the year ended September 30, 2009 was $4,580 and $0, respectively.





9.
Investment





On May 21, 2010, the Company entered into a “Co-Development and Exclusive Distribution Agreement” with Vista Therapeutics, Inc. (“Vista”) for the development and co-marketing of NanoBiosensorTM -based biomarker assessment products for use with the Company’s proprietary line of continuous patient monitoring products marketed to the elderly and senior market.  In connection with the co-development agreement, the Company made an investment in Vista’s Series B Preferred Stock in the amount of $50,000.  The Vista Series B Preferred Stock is convertible into Common Stock of Vista under certain conditions and grants to the holder certain rights and preferences, subject to prior rights granted to the holders of Vista’s Series A-1 Preferred Stock and Series A-2 Preferred Stock.





10.           Patent License Agreement





During the year ended September 30, 2009, the Company licensed the use of certain patents from a third party.  This license agreement will aid the Company as it furthers its business plan.  The Company is required to pay $300,000 plus a 5% royalty on the net sales of all licensed products and it has the right to purchase the underlying patents for 4,000,000 shares of common stock. The Company has capitalized the patents and is amortizing them over the remaining estimated useful life of 9 years.  The Company has recognized $25,235 and $14,019 of amortization expense for the nine months ended June 30, 2010 and the year ended September 30, 2009, respectively.  The Company had not paid the $300,000 as of June 30, 2010.


13





11.
Related-Party Notes Payable





During the quarter ended June 30, 2010, the Company owed $100,000 to two officers of the Company.  These notes have an annual interest rate of 12% and are due on demand.  The Company paid back $75,000 during the quarter ended June 30, 2010.  Accrued interest on these notes totaled $1,833 for the quarter ended June 30, 2010.





12.
Note Payable





The Company borrowed $30,000 from an unrelated party.  The note has an annual interest rate of 12% and is due on December 31, 2010.  The Company issued 20,000 shares of common stock to the lender along with the note.  These stocks are recorded at a value of $13,333 as discount of the note.  Accrued interest and discount amortization for this note totaled $150 and $1,005 respectively for the quarter ended June 30, 2010.





13.
Series A Convertible Preferred Stock





Concurrent with the closing of the acquisition of HG on September 10, 2009 (see Note 19), the Company issued 571,428 shares of Series A for $1.75 per share, or a total of $1,000,000.  The purchasers received one Class A warrant and one Class B warrant for each share of Series A purchased.  The Series A par value is $.00001 per share and the stated value is $1.75 per share.





The Series A is mandatorily redeemable at 125% of the stated value plus any accrued but unpaid dividends and liquidated damages at the earlier of September 4, 2010 or at the option of the holder upon the Company’s failure to keep certain obligations under the stock purchase agreement.





At any time, or from time to time, the Company may redeem all or a portion of the Series A outstanding upon twenty business days prior written notice at a price per share of preferred stock equal to 120% of the stated value plus any accrued but unpaid dividends and liquidated damages.





The Series A is convertible at any time at the holder’s option at $1.75 per share.  The conversion rate is adjusted for stock splits, combinations, dividends and distributions, reclassifications, exchanges, substitutions, reorganizations, mergers, consolidations or sales of assets. The conversion rate is also adjusted when the Company issues or sells any additional shares of common stock or equivalents, at a price per share less than the conversion rate then in effect.  In no case can the conversion be less than $0.25 per share.





Cumulative dividends of 8% of the stated value per share per annum accrue daily and are payable quarterly commencing on March 31, 2010.  Dividends are payable at the Company’s option in cash or, in certain circumstances, in registered shares of the Company’s common stock.  As of June 30, 2010, the Company had accrued approximately $19,945 of dividends for the quarter.





If the Company elects to pay any dividend in shares of common stock, the number of shares of common stock to be issued shall be an amount equal to the greater of (x) the quotient of (i) the dividend payment divided by (ii) $1.00 (as adjusted for any stock dividend, stock split, stock combination, reclassification or similar transaction) or (y) the quotient of (i) the dividend payment divided by (ii) ninety percent (90%) of the average of the Volume Weighted Average Price (VWAP, and as further defined in the certificate of designation) for the five trading days immediately preceding the date the dividend payment is due; provided, however, in the event that ninety percent (90%) of the average of the VWAP for the five trading days immediately preceding the date the dividend payment is due shall be less than $1.00 (as adjusted for appropriate adjustments for any stock dividend, stock split, stock combination, reclassification or similar transaction), at the option of at least 75% of the holders of the preferred stock, the dividend payment shall be payable only in cash.





Series A shareholders are entitled to the number of votes equal to the number of shares of common stock into which the Series A could be converted.


14




In the event of the liquidation, dissolution or winding up of the affairs of the Company, the Series A shareholders shall be entitled to receive a liquidation preference amount equal to the stated value per share plus any accrued and unpaid dividends.





Effective October 1, 2009, certain conversion features on the Series A along with the warrants were required to be classified as derivatives. See Notes 5 and 13 for further discussion.





14.
Series B Convertible Preferred Stock





On March 23, 2010, the Company issued 342,857 shares of Series B Convertible Preferred Stock (“Series B”) for $1.75 per share, or a total of $600,000.  The purchasers received one Class C warrant for each share of Series B purchased.  The Series B par value is $.00001 per share and the stated value is $1.75 per share.





The Series B is mandatorily redeemable at 125% of the stated value plus any accrued but unpaid dividends and liquidated damages at the earlier of March 23, 2011 or at the option of the holder upon the Company’s failure to keep certain obligations under the stock purchase agreement.





At any time, or from time to time, the Company may redeem all or a portion of the Series B outstanding upon twenty business days prior written notice at a price per share of preferred stock equal to 120% of the stated value plus any accrued but unpaid dividends and liquidated damages.





The Series B is convertible at any time at the holder’s option at $1.75 per share.  The conversion rate is adjusted for stock splits, combinations, dividends and distributions, reclassifications, exchanges, substitutions, reorganizations, mergers, consolidations or sales of assets. The conversion rate is also adjusted when the Company issues or sells any additional shares of common stock or equivalents, at a price per share less than the conversion rate then in effect.  In no case can the conversion be less than $0.25 per share.





Cumulative dividends of 8% of the stated value per share per annum accrue daily and are payable quarterly commencing on March 31, 2010.  Dividends are payable at the Company’s option in cash or, in certain circumstances, in registered shares of the Company’s common stock.  As of June 30, 2010, the Company had accrued approximately $12,888 of dividends as part of accrued expenses in the financial statements.





If the Company elects to pay any dividend in shares of common stock, the number of shares of common stock to be issued shall be an amount equal to the greater of (x) the quotient of (i) the dividend payment divided by (ii) $1.00 (as adjusted for any stock dividend, stock split, stock combination, reclassification or similar transaction) or (y) the quotient of (i) the dividend payment divided by (ii) ninety percent (90%) of the average of the Volume Weighted Average Price (VWAP, and as further defined in the certificate of designation) for the five trading days immediately preceding the date the dividend payment is due; provided, however, in the event that ninety percent (90%) of the average of the VWAP for the five trading days immediately preceding the date the dividend payment is due shall be less than $1.00 (as adjusted for appropriate adjustments for any stock dividend, stock split, stock combination, reclassification or similar transaction), at the option of at least 75% of the holders of the preferred stock, the dividend payment shall be payable only in cash.





Series B shareholders are entitled to the number of votes equal to the number of shares of common stock into which the Series A could be converted.





In the event of the liquidation, dissolution or winding up of the affairs of the Company, the Series B shareholders shall be entitled to receive a liquidation preference amount equal to the stated value per share plus any accrued and unpaid dividends.





Certain conversion features on the Series B, along with the warrants were required to be classified as derivatives and carried at their fair value. The fair value of these derivatives on the date of issuance of $365,754 resulted in a debt discount to be amortized over the life of the redemption provision of the preferred stock of one year. During the quarter ended June 30, 2010, $144,576 of the discount was amortized as interest expense.  The balance of the debt discount on June 30, 2010 was $221,178.  See Note 13 for further discussion.


15


15.           Derivative Liability





The Company does not hold or issue derivative instruments for trading purposes.  However, the Company has warrants and convertible preferred stock that contain embedded derivative features that require separate valuation from the convertible preferred stock.  The Company recognizes these derivatives as liabilities in its balance sheet, measures them at their estimated fair value, and recognizes changes in their estimated fair value in earnings (losses) in the period of change.  As of June 30, 2010, the derivative instruments had a fair value of $1,198,050 and the Company recognized a derivative valuation gain of $477,297 for the nine month period then ended.





16.
Preferred Stock





The Company is authorized to issue 10,000,000 shares of undesignated preferred stock, with a par value of $0.00001 per share.  Pursuant to the Company's Certificate of Incorporation, the Company's board of directors has the authority to amend the Company's Certificate of Incorporation, without further shareholder approval, to designate and determine, in whole or in part, the preferences, limitations and relative rights of the preferred stock before any issuance of the preferred stock and to create one or more series of preferred stock and fix the number of shares of each such series and determine the preferences, limitations and relative rights of each series of preferred stock, including dividend rights, dividend rates, conversion rights, voting rights, terms of redemption, redemption prices, and liquidation preferences.  On September 10, 2009, the board of directors designated the Series A.  See Note 11 for details.  On March 23, 2010, the board of directors designated the Series B.  See Note 12 for details.





17.
Common Stock





During the nine months ended June 30, 2010, the Company issued 3,672,964 shares of common stock as follows:




·
2,000,000 shares were issued for services to be performed over a 15-month period by Huskies Services, Inc. for a value of $2,020,000.


·
50,000 shares were issued in connection with a line of credit provided by an officer of the Company.


·
40,000 shares were issued for services to be performed by Catalyst:SF for a value of $40,400.


·
44,714 shares were issued in connection with dividends on preferred stock.


·
27,500 shares were issued in connection with loans to the Company.


·
110,750 shares were issued to employees for services performed for a value of $149,513.


·
1,400,000 shares were issued upon the exercise of warrants by the CEO of the Company.





18.
Warrants





During the year ended September 30, 2009, the Company issued warrants to members of the board of directors of the Company for the purchase of an aggregate of 13,500,000 shares of common stock at prices ranging from $0.25 to $1.25 per share.  All of these warrants are subject to the following vesting schedule.





Number of Warrants
Vesting Criteria1,060,000
When the Company’s stock is trading or sold2,060,000
$5,000,000 in annualized revenue2,060,000
$10,000,000 in annualized revenue2,080,000
$15,000,000 in annualized revenue2,080,000
$20,000,000 in annualized revenue2,080,000
$25,000,000 in annualized revenue2,080,000
When the Company achieves profitability





As of June 30, 2010, only 5,060,000 of these warrants had vested.  1,060,000 warrants were vested once the Company’s common stock began trading.  The Company’s board of directors accelerated vesting 4,000,000 warrants based on the CEO’s performance. The balance will only vest in future periods upon completion of specific performance criteria.





The fair value of each warrant granted was estimated on the date of grant using the Black-Scholes valuation model and assumes that the performance goals will be achieved using the following inputs: Exercise price ranging from $0.25 to $1.25; Risk free interest rate of between 2.02% - 2.71%; Expected life of 5 years; Expected dividend of 0%; and a volatility factor of 141%.  If such performance goals are not met, no compensation cost is recognized and any recognized compensation cost is reversed.  Expected volatilities are based on historical volatility of a peer company’s common stock among other factors. The Company uses historical data to estimate option exercise and employee termination within the valuation model.  The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.


16




On September 4, 2009, the Company issued 571,428 shares of Series A for $1.75 per share, or a total of $1,000,000.  The purchasers received one Class A warrant and one Class B warrant for each share of Series A purchased.  The Class A and B warrants have identical terms, other than the exercise price.  The exercise price of the Class A warrants is $1.75, and the exercise price of the Class B warrants is $2.25.  The warrants are immediately exercisable for the purchase of shares of the Company’s common stock through September 4, 2014.





The warrants have a cashless exercise feature commencing upon the earlier of 6 months following September 4, 2009 and the date the shares of common stock subject to the warrants become eligible for resale pursuant to Rule 144 under the Securities Act, if (i) the per share market value of one share of common stock is greater than the warrants’ exercise price and (ii) a registration statement under the Securities Act providing for the resale of the shares of common stock subject to the warrants is not then in effect or not effective at any time.





The warrants’ exercise price will be adjusted downward if the Company issues any additional shares of common stock (excluding certain issuances), at a price per share less than the warrants’ exercise price then in effect or without consideration (in which case such additional shares of common stock shall be deemed to have been issued at a price per share of $.00001).  If this occurs, then the warrants’ exercise price upon each such issuance shall be adjusted to the price equal to the consideration per share paid for such additional shares of common stock, and the number of shares of common stock for which the warrants are exercisable shall be increased such that the aggregate warrant exercise price payable hereunder, after taking into account the decrease in the exercise price, shall be equal to the aggregate exercise price prior to such adjustment.  In no case can the conversion be less than $0.25 per share.





The total expense associated with these warrants is $3,452,921, of which $1,491,542 was recognized in prior periods and $697,330 is being recognized as non-cash consulting expense during the quarter ended June 30, 2010.  The balance of $1,264,049/ will be expensed in future periods.





On March 23, 2010, the Company issued 342,857 shares of Series B for $1.75 per share, or a total of $600,000.  In conjunction with this private placement, the Company issued 342,857 Class C warrants at an exercise price of $3.00 per share.  These Class C warrants have the same provisions as Series A and Series B as disclosed above.  The price and number of Class B warrants has changed from $2.25 to $1.75 and from 571,428 to 734,694.  The warrants are immediately exercisable for the purchase of shares of the Company’s common stock through March 24, 2015.





19.
Segment Information





The Company is organized into two business segments based primarily on the nature of the Company's products. The Stains and Reagents segment is engaged in the business of manufacturing and marketing medical diagnostic stains, solutions and related equipment to hospitals and medical testing labs. The ActiveCare segment is engaged in the business of developing, distributing and marketing mobile health monitoring and concierge services to distributors and consumers.  The Care Services part of the Company’s business started during the quarter ended December 31, 2009. Prior to that time the Company did not allocate any expenses or assets between the segments.


The following table reflects certain financial information relating to each reportable segment for the three and nine month periods ended June 30, 2010 and 2009:





ActiveCare


Stains and

Reagents


TotalThree Months Ended June 30, 2010Sales to external customers

$
19,880


$
125,260


$
145,140Segment income (loss)

$
(2,554,080
)

$
(105,659
)

$
(2,659,739
)Segment assets

$
584,707


$
209,721


$
794,428Depreciation and amortization

$
13,170


$
6,252


$
19,422





Three Months Ended June 30, 2009Sales to external customers

$
-


$
118,952


$
118,952Segment income (loss)

$
-


$
(535,834
)

$
(535,834
)Segment assets

$
-


$
1,207,165


$
1,207,165Depreciation and amortization

$
-


$
9,316


$
9,316




17





ActiveCare


Stains and

Reagents


TotalNine Months Ended June 30, 2010Sales to external customers

$
36,371


$
347,129


$
383,500Segment income (loss)

$
(5,016,033
)

$
(611,740
)

$
(5,627,773
)Segment assets

$
584,707


$
209,721


$
794,428Depreciation and amortization

$
737,022


$
16,970


$
753,992





Nine Months Ended June 30, 2009Sales to external customers

$
-


$
350,019


$
350,019Segment income (loss)

$
-


$
(995,725
)

$
(995,725
)Segment assets

$
-


$
1,207,165


$
1,207,165Depreciation and amortization

$
-


$
15,184


$
15,184





20.
Commitments and Contingencies




The Company leases a facility under a non-cancelable operating lease that expires in November 2010.  Future minimum rental payments under the non-cancelable operating lease as of September 30, 2009 are approximately as follows:





Lease ObligationsYear Ending September 30:2010

$
87,0062011


32,1462012


20,6332013


17,600Total

$
157,385





Rent expense related to this non-cancelable operating lease was approximately $22,500 for the quarters ended June 30, 2009 and June 30, 2010.





21.
Acquisition





On September 4, 2009, the Company completed the acquisition of HG Partners, Inc. (“HG”) by acquiring 100% of HG’s common stock.  Consideration consisted of 840,000 shares of the Company’s common stock valued at $735,840.  The Company acquired HG to gain access to future financing sources, including HG’s shareholders.





No assets, nor liabilities nor operations were acquired from HG.  The purchase price of $735,840 was allocated to an intangible asset (access to financing sources).  The Company has capitalized the intangible asset and was amortizing it on a straight-line basis over the remaining useful life of 18 months.  The Company recognized $40,880 of amortization expense for the year ended September 30, 2009 comparing to $694,960 for the nine month ended June 30, 2010.  In conjunction with the issuance of the Series B, the Company expensed the remaining balance during the quarter ended June 30, 2010.


22.
Subsequent Event





Subsequent to June 30, 2010, the Company had the following transactions:
  ·
The board of directors approved the creation of a new series of preferred stock.
 ·
1,180,000 restricted shares of common stock were issued to employees and consultants of the Company for services performed.
 ·
The Company issued 128,000 restricted shares of common stock upon the exercise of warrants.
 ·
The Company approved the accelerated vesting of all prior warrants issued to the board of directors and officers of the Company.
 ·
The board approved compensation to the CEO of the Company of $350,000.  This compensation was used for the exercise of 1,400,000 warrants.


18





Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.




The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader better understand ActiveCare, our operations and our present business environment.  This MD&A is provided as a supplement to, and should be read in conjunction with, our consolidated financial statements for the fiscal years ended September 30, 2009 and 2008 and the accompanying notes thereto contained in those reports. Unless otherwise indicated, the terms “ActiveCare,” the “Company,” “we,” and “our” refer to ActiveCare, Inc., a Delaware corporation, formerly Volu-Sol Reagents Corporation, a Utah corporation.




Overview




Historically, our core business has been the manufacture, distribution and sale of medical diagnostic stains and solutions.  In February 2009, we were spun off from our former parent, SecureAlert, Inc., formerly known as RemoteMDx, Inc. (“SecureAlert”).  In connection with the spin-off, we acquired from SecureAlert the exclusive license rights to certain technology, including patent rights utilizing GPS and cellular communication and monitoring technologies for use in the healthcare and personal security markets.  In addition to the above technologies, the Company also acquired nano biosensor technology from Vista Therapeutics.  This technology will allow the Company to monitor the health and wellness of its members.  Our business plan is to develop and market products for monitoring the health and providing assistance to mobile and homebound seniors and the chronically ill, including those who may require a personal assistant to check on them during the day to ensure their safety and well being.


Recent Developments




We have financed operations exclusively through the sale of equity securities and short-term debt.  Accordingly, if our revenues continue to be insufficient to meet our needs, we will attempt to secure additional financing through traditional bank financing or a debt or equity offering. However, because of the development stage nature of our business and the potential of a future poor financial condition, we may be unsuccessful in obtaining such financing or the amount of the financing may be minimal and therefore inadequate to implement our continuing plan of operations. There can be no assurance that we will be able to obtain financing on satisfactory terms or at all, or raise funds through a debt or equity offering. In addition, if we only have nominal funds with which to conduct our business activities, this will negatively impact our results of operations and financial condition.
  In July 2010, we entered into a “Distribution Agreement” with AL Amerilife, LLC (“Amerilife”) for the distribution of our services to insurance and financial services customers of Amerilife. Under the terms of the Distribution Agreement, Amerilife is granted the exclusive right to distribute our services to the insurance and financial services market within the United States and Puerto Rico.  The exclusive grant is conditioned upon Amerilife obtaining minimum distribution levels in each year.
  During May 2010, the Company entered into a “Co-Development and Exclusive Distribution Agreement” with Vista Therapeutics, Inc. (“Vista”) for the development and co-marketing of NanoBiosensorTM -based biomarker assessment products for use with ActiveCare’s proprietary line of continuous patient monitoring products marketed to the elderly and senior market.  Under the terms of the agreement, Vista will develop instruments and software incorporating its patented and proprietary nano biosensor technology for use by ActiveCare. The newly developed products will seek to provide value-added services to the primary markets for ActiveCare’s monitoring products, allowing ActiveCare to add to its position and fall-detection monitoring, monitoring of specific health conditions using biomarkers identified jointly by the parties to the agreement.
  ActiveCare is granted an exclusive license to use the technology delivered under the co-development agreement.  In consideration of this license and the development activities of Vista under the agreement, ActiveCare will pay Vista the sum of $15,000 per month for a period of 15 months, commencing July 1, 2010. ActiveCare will also pay Vista a fee of $50,000 for each of three successfully completed assays included in double-blind studies for medical conditions jointly identified by the parties during the term of the agreement.
  In addition, ActiveCare may acquire a sub-license to Vista’s proprietary nanowire technology following the development of deliverables under the agreement. The grant of such sublicenses will be subject to the payment of fees and royalties as agreed by the parties when the sublicense becomes effective.
  In connection with the co-development agreement, ActiveCare also made an investment in Vista’s Series B Preferred Stock in the amount of $50,000.  The Vista Series B Preferred Stock is convertible into Common Stock of Vista under certain conditions and grants to the holder certain rights and preferences, subject to prior rights granted to the holders of Vista’s Series A-1 Preferred Stock and Series A-2 Preferred Stock.
  Under the trademark ActiveOneTM we have developed a product that incorporates GPS, cellular capability, and fall detection, all of which are connected to a 24 hour care center (the “CareCenter”) with the push of a button. The transmitter can be worn on a neck pendant or carried in a purse, and it sends a cellular signal to our CareCenter. When the wearer of the device pushes the button, the staff at the CareCenter evaluates the situation and decides whether to call emergency services or a designated friend or family member.





19





Marketing




We have begun selling the ActiveOneTM service through a direct mail and direct telephone campaign. Our sales team has already established a distributor network in different parts of the country and we intend to grow this distributor network as we build relationships across the U.S.  It is also our intention to place print ads in news papers and periodicals that reach the general public and specifically those that target seniors.  There are also plans for television ads that convey our message to seniors and others that have monitoring needs.




Research and Development Program




General Information




GPS technology utilizes highly accurate clocks on 24 satellites orbiting the earth owned and operated by the U.S. Department of Defense.  These satellites are designed to transmit their identity, orbital parameters and the correct time to earthbound GPS receivers at all times.  Supporting the satellites are several radar-ranging stations maintaining exact orbital parameters for each satellite and transmitting that information to the satellites for rebroadcast at frequencies between 1500 and 1600 MHz.




A GPS receiver (or engine) scans the frequency range for GPS satellite transmissions. If the receiver can detect three satellite transmissions, algorithms within the engine deduce its location, usually in terms of longitude and latitude, on the surface of the earth as well as the correct time. If the receiver can detect four or more GPS satellite transmissions, it can also deduce its own elevation above sea level.  The effectiveness of GPS technology is limited by obstructions between the device and the satellites and, therefore, service can be interrupted or may not be available at all if the user is located in the lower floors of high-rise buildings or underground.




We have conducted research and development (“R&D”) on a GPS/Cellular communications device and on a water resistant wrist device that will detect falls and include a speaker and microphone. Our goal is to develop a wristwatch-size device that incorporates Vista Therapeutics nano biosensor technology.  Once incorporated into the Company’s device, this technology will allow the Company to monitor the health of its members.


An important part of this R&D program is our relationship with Quectel Wireless Solutions, Ltd. (“Quectel”).  Quectel, based in Shanghai, China, is a supplier of high quality wireless modules and trackers that use GSM, GPRS and GPS technology.  Its products are used worldwide for automotive, smart metering, control and monitoring, tracking and tracing, payment, security, and many other Machine-to-Machine products.  In December 2009, we entered into an agreement with Quectel.  Under this agreement, Quectel manufactures our ActiveOne product and performs the research and development of the ActiveOne+ product.




CareCenter




In concert with the development of our products, we also created the CareCenter.  In contrast with a typical call center, our CareCenter is equipped with hardware and software that pinpoints the location of the incoming caller by utilizing GPS technology.  This capability is referred to as telematic.  The Care Specialist’s computer screen can identify the caller as well as locate the caller’s precise location on a detailed map.  The CareCenter will have the ability to review medical records and the information provided by nano biosensor device of the Company’s members.  We believe the CareCenter is and will be the cornerstone of our business.


Critical Accounting Policies




We prepare our consolidated financial statements in conformity with accounting principles generally accepted in the United States. As such, we are required to make certain estimates, judgments and assumptions that we believe are reasonable based on the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the periods presented. There can be no assurance that actual results will not differ from those estimates. We believe the following represent our most critical accounting policies.




20





Management considers an accounting estimate to be critical if:




·
It requires assumptions to be made that were uncertain at the time the estimate was made, and


·
Changes in the estimate or different estimates that could have been selected could have a material impact on our consolidated results of operations or financial condition.




Use of Estimates in the Preparation of Financial Statements




The preparation of financial statements requires management to make significant estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses during the reporting period.  By their nature, these estimates and judgments are subject to an inherent degree of uncertainty.  On an on-going basis, we evaluate our estimates, including those related to bad debts, inventories, intangible assets, warranty obligations, product liability, revenue recognition, and income taxes.  We base our estimates on historical experience and other facts and circumstances that are believed to be reasonable and the results provide a basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.  Actual results may differ from these estimates under different assumptions or conditions, and these differences may be material.




With respect to concentration of credit risk, allowances for doubtful accounts receivable, inventories, impairment of assets, revenue recognition, and research and development, those material accounting policies that we believe are critical to an understanding of our financial results and condition are as described below.




Concentration of Credit Risk




We have cash in bank accounts that, at times, may exceed federally insured limits.  We have not experienced any losses in such accounts.




In the normal course of business, we provide credit terms to our customers. Accordingly, we perform ongoing credit evaluations of customers' financial condition and require no collateral from customers.  We maintain an allowance for uncollectable accounts receivable based upon the expected collectability of all accounts receivable.




Accounts Receivable




Accounts receivable are carried at original invoice amount less an estimate made for doubtful receivables based on a review of all outstanding amounts on a monthly basis.  Specific reserves are estimated by management based on certain assumptions and variables, including the customer’s financial condition, age of the customer’s receivables and changes in payment histories.  Trade receivables are written off when deemed uncollectible.  Recoveries of trade receivables previously written off are recorded when received.  A trade receivable is considered to be past due if any portion of the receivable balance has not been received by the contractual pay date.  Interest is not charged on trade receivables that are past due.




Inventories




Inventories are recorded at the lower of cost or market, cost being determined on a first-in, first-out ("FIFO") method. Inventories consist of raw materials, work-in-process, and finished goods.  Provisions, when required, are made to reduce excess and obsolete inventories to their estimated net realizable values. Due to competitive pressures and technological innovation, it is possible that estimates of the net realizable value could change in the near term.




Property and Equipment





Property and equipment are stated at cost, less accumulated depreciation and amortization.  Depreciation and amortization are determined using the straight-line method over the estimated useful lives of the assets, typically three to seven years.  Leasehold improvements are amortized over the shorter of the estimated useful lives of the asset or the term of the lease.  Expenditures for maintenance and repairs are expensed while renewals and improvements over $500 are capitalized.  When property and equipment are disposed, any gains or losses are included in the results of operations.


21




Revenue Recognition




Our revenue has historically been from three sources: (i) sales from Care Services; (ii) diagnostic equipment product sales; and (iii) sales of medical diagnostic stains.




Care Services




“Care Services” include lease contracts in which we provide Care Services and lease devices to distributors or end users and we retain ownership of the leased device.




We typically lease devices on a month-to-month contract with customers (members) that use our Care Services.  However, these contracts may be cancelled by either party at anytime with 30 days notice.  Under our standard contract, the leased device becomes billable on the date the customer (member) orders the product, and remains billable until the device is returned to us.  We recognize revenue on leased devices at the end of each month that Care Services have been provided.  In those circumstances in which we receive payment in advance, we record these payments as deferred revenue.




We recognize Care Services revenue when persuasive evidence of an arrangement with the customer exists, title passes to the customer, prices are fixed or determinable and collection is reasonably assured.  Shipping and handling fees are included as part of net sales. The related freight costs and supplies directly associated with shipping products to customers are included as a component of cost of goods sold. Neither the sale of diagnostic equipment nor the sale of medical diagnostic stains contains multiple deliverables.




Customers order our Care Services product lines by phone or website.   We do not enter into long-term contracts.  All of our sales are made with net 30-day payment terms.


In connection with generally accepted accounting principles to qualify for the recognition of revenue at the time of sale, we note the following criteria that are applicable to our recognition of revenue from Care Services:




·
The price to the buyer is fixed or determinable at the date of sale.


·
The buyer has paid us, or the buyer is obligated to pay us within 30 days, and the obligation is not contingent on resale of the product.


·
The buyer's obligation to us would not be changed in the event of theft or physical destruction or damage of the product.


·
The buyer acquiring the product for resale has economic substance apart from that provided by us.


·
We do not have significant obligations for future performance to directly bring about resale of the product by the buyer.


·
The amount of future returns can be reasonably estimated and they are negligible.




Accounting standards state that, “an enterprise shall report revenues from external customers for each product and service or each group of similar products and services unless it is impractical to do so.”  The vast majority of our Care Services sales are service revenue.  Because Care Service equipment sales are not material to the financial statements, we disclose sales as one line item.




Our revenue recognition policy for sales to distributors is the same as the policy for sales to end-users.




A customer qualifies as a distributor by completing a distributor application and proving its sales tax status.  Upon qualifying as a distributor, the distributor receives a 20% discount when product is purchased in case quantities.  Our distributors are not required to maintain specified amounts of product on hand, and distributors are not required to make minimum purchases to maintain distributor status.  Distributors have no stock rotation rights or additional rights of return.  Sales to distributors are recorded net of discounts.




Sales returns have been negligible, and any and all discounts are known at the time of sale.  Sales are recorded net of sales returns and sales discounts.  There are no significant judgments or estimates associated with the recording of revenues.


22




Diagnostic Equipment Product Sales




Although not the focus of our new business model, we sell diagnostic equipment devices in certain situations. We recognize product sales revenue when persuasive evidence of an arrangement with the customer exists, title passes to the customer, prices are fixed or determinable, and collection is reasonably assured.




Medical Diagnostic Stain Sales




We recognize medical diagnostic stains revenue when persuasive evidence of an arrangement with the customer exists, title passes to the customer, prices are fixed or determinable, and collection is reasonably assured.




Shipping and handling fees are included as part of net sales. The related freight costs and supplies directly associated with shipping products to customers are included as a component of cost of goods sold.




We have no sales that contain multiple deliverables.  All of our revenues consist of sales of products, either (1) diagnostic equipment or (2) medical diagnostic stains.  The diagnostic equipment does not require installation or customization.




Historically and consistently all of our sales are made with net 30-day payment terms.  We have not changed our payment terms in the recent past (at least for five years).  We have no plans to change our payment terms in the future.




Our diagnostic stain products have not been modified significantly for several years.  There is significant history on which to base our estimates of sales returns.  These sales returns have been negligible.  Customers may return diagnostic equipment within 30 days of the purchase date.  Customers may return the medical diagnostic stains within 30 days of the purchase date provided that the stain’s remaining life is at least 8 months.  Customers must obtain prior authorization for a product return.




In connection with accounting standards criteria to qualify for the recognition of revenue at the time of sale, the following apply to our recognition of revenue from diagnostic stain sales:




·
The price to the buyer is fixed or determinable at the date of sale.


·
The buyer has paid us, or the buyer is obligated to pay us within 30 days, and the obligation is not contingent on resale of the product


·
The buyer's obligation to us would not be changed in the event of theft or physical destruction or damage of the product.


·
The buyer acquiring the product for resale has economic substance apart from that provided by us.


·
We do not have significant obligations for future performance to directly bring about resale of the product by the buyer.


·
The amount of future returns can be reasonably estimated and they are negligible.




We have 70 types of products based on the number of individual stock-keeping units (“SKUs”) in our inventory.  Most of these 70 SKUs are for medical diagnostic stain inventory.  For example, certain medical diagnostic stains are packaged in different sizes, and each packaged size (i.e., 16 oz., 32 oz., and 48 oz.) has a unique SKU in inventory.  Accounting standards state that, “an enterprise shall report revenues from external customers for each product and service or each group of similar products and services unless it is impractical to do so.”  The vast majority of our sales are of medical diagnostic stains, with a minimal portion of sales being diagnostic equipment. Because diagnostic equipment sales are not material to the financial statements, we disclose sales as one line item.




Our revenue recognition policy for sales to distributors is the same as the policy for sales to end-users.




23




A customer qualifies as a distributor by completing a distributor application and proving its sales tax status.  Upon qualifying as a distributor, a customer receives a 35% discount from retail prices, and the distributor receives an additional 5% discount when product is purchased in case quantities.  Our distributors are not required to maintain specified amounts of product on hand, and distributors are not required to make minimum purchases to maintain distributor sales.  Distributors have no stock rotation rights or additional rights of return.  Sales to distributors are recorded net of discounts.




Sales returns have been negligible, and any and all discounts are known at the time of sale.  Sales are recorded net of sales returns and sales discounts.  There are no significant judgments or estimates associated with the recording of revenues.




Results of Operations




Three Months Ended June 30, 2010 and 2009




Net Sales




Our fiscal year ends on September 30.  During the fiscal quarter ended June 30, 2010, we had net sales of $145,140 compared to $118,952 in the fiscal quarter ended June 30, 2009.  Stains and reagent revenue accounted for $125,260 and our Care Services, including revenue for the ActiveOneTM service, accounted for $19,880 of the total revenue.  The reason for the revenue increase is the introduction and revenue from services of the ActiveOne PAL during 2010.




Cost of Revenue




Cost of revenue totaled $161,297 in the fiscal quarter ended June 30, 2010, compared to $95,224 for the quarter ended June 30, 2009.  Of the total cost of revenues, stains and reagents accounted for $86,772 and Care Services accounted for $74,525.  The increase between the comparable quarters is due to the operation of our 24 hour a day, 7 days a week and 52 weeks a year CareCenter.




Research and Development Expenses




During the quarter ended June 30, 2010, we incurred research and development expenses of $16,610 compared to $12,538 in research and development expense incurred during the fiscal quarter ended June 30, 2009. The research and development expenses in the quarter ended June 30, 2010 has increased due to expenses related to the development of the ActiveOne+TM product.  We expect research and development expenses to increase in future quarters.




Selling, General and Administrative Expenses




During the three months ended June 30, 2010, selling, general and administrative expenses totaled $2,070,983, compared to the same period one year ago, which totaled $550,947.  The increase in 2010 is the result of the following:




·
Other general and administration expenses including salaries increased $330,931.


·
Advertising expense associated with the ActiveOne product increased $111,026.


·
Non cash expense associated with the issuance of stock and warrants increased $493,957.


·
Non cash amortization of patents and other intangible assets increased $2,274.


·
Consulting expenses increased $505,472.


·
Travel expenses increased $76,376.




Other Income and Expense




During the quarter ended June 30, 2010, interest expense was $394,657, compared to interest income of $1,523, net of interest expense of $739 in the quarter ended June 30, 2009.




Net Loss




We had a net loss for the three months ended June 30, 2010 totaling $2,659,739, compared to a net loss of $535,834 for the same period one year ago.  This increase in net loss is due to the items described above.


24


Nine Months Ended June 30, 2010 and 2009




Net Sales




During the nine months ended June 30, 2010, we had net sales of $383,500 compared to $350,019 in the nine months ended June 30, 2009.  Stains and reagent revenue accounted for $347,129 and our Care Services, including revenue for the ActiveOneTM service accounted for $36,371 of the total revenue.  The reason for the revenue increase is the introduction and revenue from services of the ActiveOne PAL in 2010.




Cost of Revenue




Cost of goods sold totaled $469,994 in the first nine months ended June 30, 2010, compared to $299,136 for the nine months ended June 30, 2009.  Of the total cost of revenues, stains and reagents accounted for $273,382 and Care Services accounted for $196,612.  The increase between the comparable quarters is due to the operation of our 24 hours a day, 7 days a week and 52 weeks a year CareCenter.




Research and Development Expenses




During the nine months ended June 30, 2010, we incurred research and development expenses of $213,579 compared to $138,944 during the nine months ended June 30, 2009. The research and development expenses in the nine months ended June 30, 2010 are for the development of the ActiveOne+ TM.




Selling, General and Administrative Expenses




During the nine months ended June 30, 2010, selling, general and administrative expenses totaled $4,712,066 compared to the same period one year ago, which totaled $956,757.  The increase in 2010 is the result of the following:




·
Other general and administration expenses including salaries increased $542,650.


·
Advertising expense associated with the ActiveOne product increased $279,469.


·
Non cash expense associated with the issuance of stock and warrants increased $1,320,297.


·
Non cash amortization of patents and other intangible assets increased $714,414.


·
Consulting expenses increased $780,414.


·
Travel expenses increased $118,065.




Other Income and Expense




During the nine months ended June 30, 2010, interest expense was $1,092,589, compared to interest income of $13,486, net of interest expense of $1,237 in the nine months ended June 30, 2009.




Net Loss


We had a net loss for the nine months ended June 30, 2010 totaling $5,627,773, compared to a net loss of $995,725 for the same period one year ago.  This increase in net loss is due primarily to the items described above.




Liquidity and Capital Resources
  Nine Months ended June 30, 2010
  We have not historically financed operations entirely from cash flows from operating activities.  During the year ended September 30, 2009, we supplemented cash flows with funding from the sale of equity securities.
  At June 30, 2010, we had unrestricted cash of $97,172, compared to cash of $830,931 at September 30, 2009. At September 30, 2009, we had a working capital deficit of $131,471, compared to a working capital deficit of $3,360,537 at June 30, 2010.


25




During the nine months ended June 30, 2010, operating activities used cash of $1,620,790.  Investing activities for the nine months ended June 30, 2010 used cash of $117,969.  Financing activities for the nine months ended June 30, 2010 provided $1,005,000 of net cash.




For the nine months ended June 30, 2010, we had a net loss of $5,627,773 and negative cash flows from operating activities totaling $1,620,790 , compared to a net loss of $995,725 and negative cash flows from operating activities of $565,373 for the nine months ended June 30, 2009.  As of September 30, 2009, our working capital deficit was $131,471 compared to a working capital deficit of $3,360,537 at June 30, 2010.  As of June 30, 2010, we had an accumulated deficit of $11,026,540compared to $5,057,151 at September 30, 2009, and stockholders’ deficit at June 30, 2010, was $2,813,543, compared to stockholder’s equity of $986,437 at September 30, 2009.




Recent Accounting Pronouncements




In September 2006, the Financial Accounting Standards Board (FASB) issued guidance which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements.  It is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years.  In February 2008, the FASB extended the effective date to fiscal years beginning after November 15, 2008.  We adopted this guidance on October 1, 2009.  This guidance did not have a material impact on our financial statements.




In December 2007, the FASB issued guidance which requires an acquirer of a business to measure the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquiree at their fair values on the acquisition date, with goodwill being the excess value over the net identifiable assets acquired.  It clarifies that a non-controlling interest in a subsidiary should be reported as equity in the financial statements, net income shall be adjusted to include the net income attributed to the non-controlling interest and comprehensive income shall be adjusted to include the comprehensive income attributed to the non-controlling interest.  The calculation of earnings per share will continue to be based on income amounts attributable to the parent.  This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2008.  Early adoption is prohibited.  We adopted this guidance on October 1, 2009.  This guidance did not have a material impact on our financial statements.




In November 2008, the FASB provided guidance which clarifies the accounting for certain transactions and impairment considerations involving equity method investments. This guidance is effective for fiscal years beginning after December 15, 2008, with early adoption prohibited.  We adopted this guidance on October 1, 2009.  This guidance did not have a material impact on our financial statements.




In June 2008, the FASB provided guidance which assists in determining whether an instrument (or embedded feature) is indexed to an entity’s own stock. This amendment is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early application is not permitted. A contract that would otherwise meet the definition of a derivative but is both (a) indexed to our own stock and (b) classified in stockholders’ equity in the statement of financial position would not be considered a derivative financial instrument. This amendment provides a new two-step model to be applied in determining whether a financial instrument or an embedded feature is indexed to an issuer’s own stock and thus able to qualify for the this exception. We adopted this guidance on October 1, 2009. The adoption was considered a change in accounting principle, and the cumulative effect from the adjustment was applied to the opening balance of accumulated deficit. See Note 5 of the financial statement for further discussion.




In June 2009, the FASB issued accounting guidance on the consolidation of variable interest entities (VIEs). This new guidance revises previous guidance by eliminating the exemption for qualifying special purpose entities, by establishing a new approach for determining who should consolidate a variable-interest entity and by changing when it is necessary to reassess who should consolidate a variable-interest entity.  This guidance will be effective at the beginning of the first fiscal year beginning after November 15, 2009. Early application is not permitted. We adopted this guidance during the quarter ended December 31, 2009.  This guidance did not have a material impact on the financial statements.




In September 2009, the FASB issued guidance that changes the existing multiple-element revenue arrangements guidance currently included under its Revenue Arrangements with Multiple Deliverables codification. The revised guidance primarily provides two significant changes: 1) eliminates the need for objective and reliable evidence of the fair value for the undelivered element in order for a delivered item to be treated as a separate unit of accounting, and 2) eliminates the residual method to allocate the arrangement consideration. In addition, the guidance also expands the disclosure requirements for revenue recognition. This will be effective for the first annual reporting period beginning on or after June 15, 2010, with early adoption permitted provided that the revised guidance is retroactively applied to the beginning of the year of adoption. We are currently assessing the future impact of this new accounting update to its financial statements.




26


In October 2009, the FASB issued guidance on share-lending arrangements entered into on an entity's own shares in contemplation of a convertible debt offering or other financing.  This new guidance is effective for fiscal years beginning on or after December 15, 2009, and fiscal years within those fiscal years for arrangements outstanding as of the beginning of those years. Retrospective application is required for such arrangements and early application is not permitted.  The adoption of this guidance is not expected to significantly impact our results of operations and financial position.




In January 2010, the FASB issued guidance which requires an entity to disclose the following:




·
Separately disclose the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe reasons for the transfers.


·
Present separately information about purchases, sales, issuances and settlements, on a gross basis, rather than on one net number, in the reconciliation for fair value measurements using significant unobservable inputs (Level 3).


·
Provide fair value measurement disclosures for each class of assets and liabilities.


·
Provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements for fair value measurements that fall in either Level 2 or level 3.




This guidance is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements.  Those disclosures are effective for fiscal years beginning after December 15, 2010. We adopted this guidance during the quarter ended December 31, 2009.  This guidance did not have a material impact on the financial statements.




Going Concern




Our significant accumulated deficits and negative cash flows raise substantial doubt about our ability to continue as a going concern. The financial statements included in this report do not include any adjustments that might result from the outcome of this uncertainty.  Our plan with respect to this uncertainty is to focus on sales of our reagent products and our Care Services, to complete strategic acquisitions and business combinations, and to raise capital through the offer and sale of our equity securities.  There can be no assurance that revenues will increase rapidly enough to offset operating losses and repay debts.  Likewise, there can be no assurance that we will be successful in raising additional capital from the sale of equity or debt securities.  If we are unable to increase revenues or obtain additional financing, we will be unable to continue the development of its products and would likely cease operations.




Item 3.  Quantitative and Qualitative Disclosures about Market Risk
  None.
  Item 4.  Controls and Procedures.
  Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)). Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were not effective.  We and our auditors identified a material weakness discussed below in the management’s report on internal control over financial reporting.


27




Report of Management on Internal Control over Financial Reporting




Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that:




(i)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;





(ii)
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and





(iii)
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on the financial statements.




Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.




Management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.  A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement to our annual or interim financial statements will not be prevented or detected.




In the course of the management's assessment, it has identified the following material weakness in internal control over financial reporting.  Because of our small size, in terms of the number of employees, we lack segregation of duties and that is a material weakness.  As we grow, this weakness will be mitigated.




We are in the process of improving our internal control over financial reporting in an effort to eliminate this material weakness.  In the mean time we are working to improve supervision and training of our staff to further mitigate the weakness of lacking segregation of duties.  However, additional effort is needed to fully remedy this deficiency. Our management, audit committee, and directors will continue to work with our auditors and outside advisors to ensure that our controls and procedures are adequate and effective.




PART II – OTHER INFORMATION




Item 1. Legal Proceedings.




We are not involved in any legal proceedings which management believes will have a material effect upon the financial condition of the Company, nor are any such material legal proceedings anticipated.




We are not aware of any contemplated legal or regulatory proceeding by a governmental authority in which we may be involved.




Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.




On March 25, 2010, we sold 342,857 shares of newly designated Series B Convertible Preferred Stock (the “Series B”). The aggregate purchase price of the Series B shares was $600,000 or $1.75 per share. The purchasers of the Series B shares were Gemini Master Fund, Ltd. and Harborview Master Fund, LP. The purchasers also received common stock purchase warrants to purchase 342,857 shares of our common stock at a price of $3.00 per share.




28





The Series B is convertible to common stock at a conversion price of $1.75 per share, subject to adjustment under conditions enumerated in the Designation of Rights and Preferences of the Series B (the “Designation”). The right of conversion is subject to the limitation that at no time may a holder of shares of the Series B convert such shares if the number of shares of common stock to be issued pursuant to such conversion would cause the holder to be directly or indirectly the beneficial owner (as determined in accordance with Section 13(d) of the Exchange Act, and the rules thereunder) of more than 4.99% of our issued and outstanding common stock. The holder may waive this limitation under certain circumstances by giving advance written notice to the registrant, as provided in the Designation.




The offer and sale of the Series B shares were not registered under the Securities Act of 1933, in reliance upon exemptions from registration available for private sales of securities under Section 4(2) of the “Securities Act” and Regulation D promulgated under the Securities Act. The purchasers of the Series B shares are accredited investors.




As part of the transaction involving the sale of the Series B, we also amended the agreement for the sale of our previously designated Series A Convertible Preferred Stock (the “Series A”). Under the amended agreement with the holders of the Series A, the parties agreed to remove the requirement that we file a registration statement covering the shares of common stock issuable upon conversion of the Series A. The parties also agreed to amend the warrants issued in connection with the sale of the Series A shares to conform with the terms, including the expiration date, of the warrants issued in connection with the sale of the Series B shares.




Proceeds from the sale of the Series B shares will be used by the registrant for general administrative and operating expenses.




Item 3.  Defaults Upon Senior Securities.




None.




Item 6. Exhibits.





Exhibit Number                                                                  Description


(3)(i)
Articles of Incorporation (previously filed as an exhibit to the Company’s Registration Statement on Form S-1 and incorporated herein by reference).(3)(i)
Articles of Amendment to Articles of Incorporation (previously filed as an exhibit to the Company’s Registration Statement on Form S-1 and incorporated herein by reference).(3)(i)
First Amended and Restated Certificate of Designation of Rights and Preferences of the Series A Convertible Preferred Stock, filed March 25, 2010.(3)(ii)
Bylaws (previously filed as an exhibit to the Company’s Registration Statement on Form S-1 and incorporated herein by reference).(3)(ii)
Certificate of Designation of Rights and Preferences of the Series B Convertible Preferred Stock, filed March 25, 2010.(3)(iii)
Designation of Rights and Preferences of Series A Convertible Preferred Stock, September 10, 2009 (previously filed as exhibit to Current Report on Form 8-K, filed September 11, 2009, incorporated by reference).(3)(iv)
Articles of Amendment to Articles of Incorporation changing name to ActiveCare, Inc. (incorporated by reference from the Company’s 10-K for the year ended September 30, 2009)(3)(v)
Certificate of Incorporation in Delaware, July 15, 2009, (incorporated by reference to exhibit filed with the Company’s 10-K for the year ended September 30, 2009)(3)(vi)
By Laws of Company reflecting name change (incorporated by reference to exhibit filed with the Company’s annual report on Form 10-K for the year ended September 30, 2009).  29
 (4)
Specimen of common stock certificate (previously filed as an exhibit to the Company’s Registration Statement on Form S-1 and incorporated herein by reference).(4)(i)
Amended and Restated Class A Warrant to Purchase Common Stock(4)(ii)
Class B Warrant to Purchase Common Stock(4)(iii)
Class C Warrant to Purchase Common Stock(10)(i)
Lease Agreement between RJF Company Ltd., and the Company, dated as of August 1, 2005 (previously filed as an exhibit to the Company’s Registration Statement on Form S-1 and incorporated herein by reference).(10)(i)
Series B Convertible Preferred Stock Purchase Agreement dated March 25, 2010(10)(ii)
Loan Agreement between the Company and SecureAlert (previously filed as in exhibit to the Company’s Registration Statement on Form S-1 and incorporated herein by reference).(10)(iii)
Promissory Note dated as of October 1, 2008 (previously filed as an exhibit to the Company’s Registration Statement on Form S-1 and incorporated herein by reference).(10)(iv)
Professional Services Contract between the Company, and VPI Engineering, dated as of September 27, 2007, together with addenda (previously filed as an exhibit to the Company’s Registration Statement on Form S-1 and incorporated herein by reference).(10)(v)
Securities Purchase Agreement between the Company and ADP Management, dated as of November 15, 2007 (previously filed as an exhibit to the Company’s Registration Statement on Form S-1 and incorporated herein by reference).(10)(vi)
License Agreement between the Company and SecureAlert (incorporated by reference to exhibit filed with the Company’s report on Form 10-Q for the period ended June 30, 2009).(10)(vii)
License Agreement between the Company and Futuristic Medical Devices, LLC (incorporated by reference to exhibit filed with the Company’s report on Form 10-Q for the period ended June 30, 3009).(10)(viii)
License Agreement between the Company and euromicron (incorporated by reference to exhibit filed with the Company’s report on Form 10-Q for the period ended June 30, 2009).(10)(ix)
Statement of Work between Company and Quectel Wireless Solutions, Ltd. (incorporated by reference to exhibit to Company’s report on Form 10-K for the year ended September 30, 2009).(11)
Computation of Statement of Earnings (included in financial statements filed herewith)(31)(i)
Rule 13a–14(a)/15d–14(a) Certifications(32)
Section 1350 Certifications


30





SIGNATURES





Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.





ActiveCare, Inc./s/  James DaltonJames Dalton

Chairman of the Board of Directors

and Chief Executive Officer (Principal

Executive Officer)





Date: August 16, 2010





/s/  Michael G. ActonMichael G. Acton

Chief Financial Officer (Principal

Financial and Accounting Officer)





Date: August 16, 2010







31


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